Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by the Food and Drink Federation

  The Food and Drink Federation (FDF) is the voice of the UK food and drink manufacturing industry. Our industry is the UK's largest manufacturing sector with an annual gross output of over £69 billion. FDF has a diverse membership which includes the UK's two primary sugar processors, four starch manufacturers and a large number of sugar and sweetener users.

  FDF broadly welcomes the Commission's sugar reform proposals which were tabled on 22 June 2005. We have considered these carefully and would now like to offer policy-makers some preliminary comments which are set out below:

1.  BASIC POSITIONS

  Starch manufacturers[1] would like production quotas to be abolished. If they are to remain, manufacturers would like to see a significant expansion of the isoglucose quotas in order to help offset any institutional price cut for sweeteners and to realise economies of scale.

  Sugar processors accept that reform of the EU sugar regime is inevitable. Processors would like to highlight the complex and sensitive issues that reform raises and the severe financial impact the proposal would have. Tate and Lyle welcomes attempts to ensure some measure of equity and security in the supply of raws, but believes the proposed cut to its refining margin is disproportionate and its exclusion from the private storage system and the lack of a facility to lower its raw material price is discriminatory. British Sugar welcomes plans to introduce a voluntary restructuring scheme for the industry, but is concerned that the proposed price cuts go too far and that the proposal is lacking on the external trade side.

  Sugar users would like to see production quotas abolished and a market price develop for sugar and sweeteners. They are concerned that the proposal does not contain any mechanisms to ensure that there is real competition between EU sugar processors, or that the domestic "market price" for sugar will be driven by the "reference price".

  The comments below should be considered in the light of these overarching positions.

2.  GENERAL COMMENTS

  FDF members are concerned by the vagueness of the reform proposals and the power that they confer upon the Commission and the Sugar Management Committee. We appreciate the desire to reduce complexity in the Council regulation but believe that this has been taken too far. Further elaboration of the proposals, and notably of the new tools which the Commission plans to introduce, is urgently needed. The Commission should also produce full details of how it plans to exercise its powers when designing implementing legislation.

3.  TIMING

  FDF members appreciate that additional commercial certainty will be created by extending the life of a new Sugar Regime until 2014-15. However, none of our members would like to see the regime as described in this Commission proposal, lasting until 2014-15. We accept that it may be unwise to provide for a full scale mid-term review of the regime. However, many of our members believe that a provision to enable occasional "health checks" should be introduced, especially as a number of the Commission's proposed mechanisms are new and it is unclear how effective they will be.

4.  PRICES

  FDF members are unconvinced that the proposed reference price system would actually work and are unsure what real impact it would have on EU market prices, especially as the number of EU sugar suppliers will contract under the current proposal and the future of the external sugar tariff remains unknown. FDF members note that the existing reference price system for pigmeat does not work as an indicator of internal market prices. Sugar processors would like to retain the intervention purchasing system as they are not convinced that the reference price system would offer an effective floor to the internal market, and as they will still be required by law to pay minimum prices for raw materials. If institutional pricing for sugar is to remain, sugar users believe that the new system must drive actual market prices.

  FDF members appreciate that some form of price reporting system will be necessary to ensure the effectiveness of the new reference price system and to activate the private storage scheme and import quota provision. We are concerned however by the Commission's reluctance to elaborate upon how the system would work and how the triggers for market intervention would be set. We note that previous price reporting systems for sugar, and a number of other commodities, have not worked well in the past. Lessons must be learnt from these experiences. Price information is commercially sensitive and its publication may not be the most effective way to promote a competitive market. Furthermore, sugar is not a simple bulk commodity and prices vary considerably depending on quality, service specification, time of the year, contract duration and other factors. Accurate reporting would require price figures to be broken down significantly and this may be unhelpful for both processors and users.

  FDF members agree that there is insufficient information available to judge the merits of the proposed private storage scheme. However, at first glance the proposal appears unstable, unrealistic and not helpful to the UK. This scheme is being proposed as one of three mechanisms to aid with the disposal of surplus sugar. We expect it will be the Commission's last resort as it will be required to pay the bill. Tate and Lyle believes its exclusion from this scheme is discriminatory.

5.  QUOTAS

  Members agree that it would be a sensible simplification to merge the A and B production quotas following the abolition of producer levies as the distinction would no longer be necessary. Members note that this decision would benefit surplus sugar producing nations such as France and Germany as their B quotas incorporate large surpluses.

  FDF members note that a number of UK industries would benefit from the expansion of the isoglucose quotas. Starch manufacturers are adamant that if production quotas are to remain, they would need a significant expansion of the isoglucose quotas in order to help offset any institutional price cut for sweeteners and to realise economies of scale. Sugar users would like to be able to source isoglucose according to domestic demand and not be constrained by quotas. Members note that the current restrictions prevent users from taking advantage of the functionalities of isoglucose. British Sugar believes that production quotas on isoglucose will need to remain so long as there are quota restrictions on sugar.

  FDF members accept that the notion of introducing quota tradeability is politically contentious. We also appreciate that the Restructuring Fund and the provision to allow sugar processors to convert 1 million tonnes of C sugar into quota by purchase, will help the European industry to restructure. Despite this, we still believe that quota tradeability should be introduced to enable the industry to restructure more effectively.

  Members acknowledge that by excluding sugar for the chemical, pharmaceutical and bioethanol industries from production quotas, the EU will create an outlet for non-quota sugar. Starch manufacturers are concerned however that this provision will put their products at a competitive disadvantage compared with sugar when selling into these industries.



6.  RESTRUCTURING SCHEME

  FDF members agree that efforts to assist in the restructuring of the EU sugar industry will be necessary, both for political and economic reasons. However, members are divided in their views on the proposed voluntary restructuring scheme. Sugar processors are in favour of it. Sugar users are concerned that it may inadvertently encourage some of the EU's more efficient processors to exit the market. They are also worried that it may lead to further industry consolidation and a reduction of competition on the domestic market. Users also object to the fact that they will effectively have to fund this restructuring scheme.

  Starch manufacturers believe they are effectively being asked to pay a higher digressive restructuring levy than sugar processors in the Commission proposal. In their view, sugar processors will be able to recoup 58% of the levy from beet growers as a result of price cuts, whereas starch manufacturers will have to fund 100% of the levy themselves. They believe that both groups should pay the same effective levy rate taking into account each sector's raw material costs.

7.  FARMER COMPENSATION

  FDF members acknowledge that politically, farmers will need to be compensated for the income loss arising from Sugar Regime reform. We accept the proposal to compensate for 60% of the price cut, to pay this compensation via the Single Farm Payment and for the payment to be fully decoupled, so long as every member state is subject to the same conditions.

  We agree that sugar beet should qualify for set-aside payments when it is grown as a non-food crop and we believe that this production should also be eligible for the energy crop aid for

45/hectare.

8.  OUT OF QUOTA PRODUCTION

  British Sugar would not support the introduction of a "super levy" to dissuade producers of sugar from exceeding their production quotas. Sugar beet yields are highly variable and unlike dairy farmers, sugar beet growers are not so easily able to control their yields in order to avoid paying this levy. Tate and Lyle, sugar users and starch manufacturers would support the introduction of a "super levy" given the lack of export flexibility that will be available in the future.

  Sugar processors and users support the proposal to enable processors to purchase part of an additional one million tonnes of quota for a one-off payment. However, sugar processors believe the proposed price of this quota—

730/t—is unreasonably high. Starch manufacturers are astonished that the Commission has proposed to increase the EU sugar quota by one million tonnes, whereas the proposed increases in the isoglucose quotas are minimal.

9.  MARKET MANAGEMENT

  British Sugar believes that it would be sensible to start the sugar marketing year on 1 October, instead of 1 July, as this would complement the annual sugar beet production cycle. Sugar users and starch manufacturers could accept this suggestion so long as they would not be required to pay the restructuring levy or a higher price for sugar for an additional three months during the implementation of a new sugar regime. Furthermore, sugar and isoglucose producers only wish to pay the levy on actual production and not production quotas. Tate and Lyle questions how this would relate to the refiners' supply, the terms of the Sugar Protocol and a potential phasing-in of the arrangements for the cane suppliers which have different crop and delivery cycles.

10.  TRADE WITH THIRD COUNTRIES

  Sugar users welcome the Commission's proposal to open-up the EU market to additional supplies from third countries if and when the EU sugar price becomes substantially inflated. They believe this mechanism will be essential to ensure the EU market price for sugar falls and that the UK food industry does not become uncompetitive on the world market. Sugar processors are concerned about this proposal however, given the perceived lack of an effective institutional mechanism to put a floor to the EU market and the risk of an over-supply emerging.

11.  PREFERENTIAL SUGAR IMPORTS

  FDF members note that the Commission communication is sugar beet focused and that the EU's development commitments to sugar producers in African, Caribbean and Pacific (ACP) countries and Least Developed Countries' (LDC) have not been well thought through.

  We note the proposal to provide ACP countries with

40 million of restructuring aid in 2006. We are not in a position to know whether this will be sufficient and we do not believe that the Impact Assessment is robust enough for the Commission to know either. Expeditious resolution of the debate over the Financial Perspectives is desirable so that ACP producers will have the necessary information about the range of accompanying measures and the finances likely to be available to them in the short- to medium-term.

  FDF members are pleased to see that the EU's import commitments to the ACP countries and India, the world's LDCs and the western Balkans will continue. We are also content for the Traditional Supply Needs mechanism to remain. It will be essential that there is equitable treatment of existing and potential cane refiners.

12.  PROVISION FOR EXPORTS

  FDF members accept that the EU must abide by its World Trade Organisation (WTO) export subsidy reduction commitments and that the EU is committed to eliminating all export subsidies by a date to be agreed as part of the ongoing WTO talks. We are opposed to the idea that the Commission may impose linear production and import quota cuts from 2010 if the EU is in danger of breaching its WTO commitments. The UK does not contribute to the EU sugar surplus, and as such, should not be forced to pay for it through the introduction of a pro-rata system for allocating quota cuts, ie the declassification key should remain. Starch manufacturers do not believe that any quota cuts should apply to them as they do not claim export refunds. Sugar users note than when quotas have been cut in previous reviews of the Sugar Regime, market prices have gone up and this is of concern to them.

  FDF members welcome the Commission's commitment to retain Non-Annex One (NA1) export refunds whilst EU sugar prices remain above "world price" levels. At the moment, NA1 refunds are calculated by adding up the refunds available on a processed product's raw materials. Under the current system, if export refunds are eliminated on sugar, the NA1 refunds on the sugar content of manufactured products for export will also be zero. Therefore, the Commission will need to devise an alternative method for calculating NA1 export refund rates in the future. The Commission will need to ensure that the new calculation is WTO legal, bearing in mind that Part V, Article 11.1 of the WTO Agreement on Agriculture states—"In no case may the per-unit subsidy paid on an incorporated (processed) agricultural primary product exceed the per-unit export subsidy that would be payable on exports of the primary product."

  sugar processors agree that production refunds for sugar used in the chemical and pharmaceutical industries should remain. Starch manufacturers on the other hand, believe that these refunds should be eliminated as they give sugar processors a competitive advantage.

13.  IMPACT OF REFORM

  FDF members are not at this stage in a position to critique the Commission's updated Impact Assessment of the proposed reforms. Our initial impression however, is that it is superficial and lacing in economic and intellectual rigor. In many places it is apparent that the figures have been based on implementation of the Commission's July 2004 White Paper, and not the current proposal. A robust impact assessment will be necessary to help inform the decision-making process. Therefore, we recommend that the Commission should devote the necessary resources to ensure that a robust document is available.

14.  COMPETITION

  Any new sugar regime should encourage and enable greater competition than that which currently exists in the EU market. Sugar users do not believe that the current proposal will ensure this.

Food and Drink Federation

August 2005





1   The term starch manufacturers refers to producers of isoglucose and glucose syrups. Back


 
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